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This Time Really is Different

Note to members: I have received responses from almost everyone regarding the mailing list for the new fund in the works. If you would like to receive an accredited investor questionnaire and future updates on the fund as they come available, please contact me. I will update the list tonight and do my best to respond to everyone by Tuesday, June 18.

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The futures are pointing up. I’ll go long on the opening, but I’m looking for a reversal at the neckline (about 1641) of the IH&S we’ve been tracking.For seven months, now, SPX has shot up through a steep channel — tacking on over 300 points since its 1343 low last November.

Including the November reversal itself, SPX has bounced off the bottom or the .25 line of the channel 4 times prior to June 2013.

Each time, the bounce was vigorous — jumping up into not just the next higher level of the channel, but two levels higher, and with little hesitation.

This time, SPX didn’t just hesitate. It came right back down and bounced off the bottom of the purple channel a second time. We can characterize that as a successfully passed test. We could also say it’s a testament to the growing influence of the bears. But, it was different.

The reversal off the recent top wasn’t terribly difficult to anticipate. Seemingly every talking head on the boob tube was calling for a 5% correction, and it did have a very “engineered” feeling about it at times.

Before the market opened on May 21 — the day I first called the top [a day early, see: If It’s Tuesday] — I wrote:

…we could be nearing the beginning of the fourth downturn, with a low to come around June 3-4. Could it be more than a whopping 4%, or is that all that’s programmed in?

-4.4% over six sessions in late December 2012

-3.1% over four sessions in February

-3.9% over five sessions in April 2013

When SPX reached our target later in the day, I posted a forecast showing a drop to 1600. In the end, we reached 1598 on Jun 6.

Without getting into a metaphysical discussion about greater forces, etc., is the market really that predictable? Buy and hold types argue that owning a well-diversified portfolio of solid companies with good balance sheets and smart management is a good way to make money in the market.

I can’t argue with that. In a constantly rising market, it makes perfect sense. But, is it necessary to ride out every downturn along the way? Why not profit from them, instead? Why not keep an eye on moving averages, channels, harmonic patterns, analogs, etc. and manage your exposure accordingly? It sure hasn’t hurt our results.

Consider the past 20 years. Wouldn’t it have been nice to reduce exposure or even go short during the crashes of 2000-2002 or 2007-2009? It’s something to think about the next time someone tells you that shorting is too risky.

Our purple channel looks significant even against the backdrop of past 20 years. It levitated SPX right up through the midline of the yellow channel this past New Years Day, when many patterns called for a reversal (holiday week, low volume ramp job on the fiscal cliff “solution” – don’t get me started!)

It broke the pattern of SPX dropping three rungs on the channel and regaining two (the next drop would have been out of the channel.) But, note that every single previous move through any of the channel lines was followed by a backtest of some sort. There were zero clean slices through — up or down — without some sort of reaction.

I can’t imagine that this one will suddenly break the mold. When it happens, it will announce itself by doing something out of the ordinary, something different. It will almost certainly involve the breakdown of a channel…maybe even our purple channel.

Stay tuned.

UPDATE: 9:40 AM

Reached the neckline, taking a short position here at 1641, stops at 1642.

It’s not that I don’t expect it to complete, just that these patterns usually struggle at bit at the neckline itself.

UPDATE: 9:45 AM

Just tagged our stop, so I’ll switch back to the long side. The next serious resistance isn’t until 1650, though we should expect a back test of the neckline at some point.

Our previous resistance — the neckline at 1641 — is now our support. So, 1640ish stops make sense. Don’t be surprised if SPX closes just below or at least near the neckline in advance of the Fed policy statement (due out Wednesday at 2pm ET — at which time the neckline should be about 1641.60.)

Recall that the last time Bernanke had anything to say about QE, the market began the 89 point slide discussed above. See his prepared remarks to the Joint EconomicCommittee here. There had been plenty of talk about QE ending or tapering before, but this time Bernanke seemed a little more serious about the idea.

This one is pretty easy: if Wednesday’s news amps up fears of tapering, look for a sell off. If, instead, Bernanke grins and yells “psych!” then it’s probably off to the races again. Since the market seems intent on doing nothing until then, we’ll examine what either of those eventualities might mean.